As a result of rising crude oil prices, and taking advantage of a drop in the country’s inflation rate in May, China raised gasoline and diesel prices for the first time in eight months this Friday. As of midnight, gasoline prices were raised by 0.8 yuan (12 cents), and diesel 0.92 yuan (13 cents), per liter. This brings gasoline prices to 6.2 yuan per liter in China, or approximately $3.47 per gallon. In most parts of the United States, gasoline now sells for $4.00 or more per gallon. However, taxes account for 11 percent of the retail price, so the net price per gallon in the U.S. is approximately $3.56 per gallon.

It appears that the Chinese government took advantage of the drop in inflation from 8.3 percent in March to 7.7 percent in May to bring energy prices in the country more in line with global prices. At the same time, China announced that it will raise electricity charges for commercial units as of July 1.

“Of all the industries you could have picked,” I am frequently asked, “Why automotive components? It’s a mature industry.” And that’s true. In developed economies like the United States, automotive is a mature industry. But in developing economies like China, it can be a growth industry.

Ever since it joined the World Trade Organization in December, 2001, the production and sales of vehicles—trucks, buses and passenger cars— in China has increased by at least one million units each year. China’s auto industry has grown by an incredible 20 percent to 50 percent each and every year since WTO entry, and in 2008, China will produce over 10 million vehicles, most likely surpassing vehicle production in the United States.

Although everyone is on the China bandwagon today, that was not always the case. It wasn’t long ago that global auto executives questioned how a country whose per capita income is only $1,000 (approximately the level for China at the beginning of this century) could possibly afford to buy passenger cars. No one asks that question anymore. But, it should not have taken so long for industry observers to become believers. As early as 1992, anyone who believed that China’s economy would continue to grow, could easily predict, as day follows night, that China would have a very large auto industry. Quite simply, there is no other way to get people and goods around a country the size of China without a system of highways—and plenty of trucks, buses and passenger cars.

When I came to China in 1992, the first thing that struck me about the country was its size. China is big. Almost to the square kilometer, China is the same size as the United States, which meant that every industry was fragmented, and companies were doing business locally rather than nationally. As China’s transportation and telecommunications infrastructure improved, I reasoned, industries would begin to consolidate, and companies able to do business nationally would come to the forefront. Rather than investing in individual companies, therefore, it became more important to pick an industry and develop a strategy for creating the leading company in that industry.

But that begged the question: What industry? Fortuitously, I was invited to attend a Euromoney Conference in Shanghai in September, 1992, and I went there hoping to get some answers. As I describe in Managing the Dragon, here is what happened:

One of the featured presenters at the conference was Dr. Stefan Messmann, a senior executive with Volkswagen. In his remarks, he explained to the roughly 300 people in attendance that Volkswagen viewed China as one of its key growth markets. The company had already invested more than $350 million in two joint ventures, in Shanghai and Changchun, and had clearly taken an early lead in the race to develop China’s automotive industry.

I was surprised. At that point, it wasn’t clear that China even had an auto industry. The streets were filled with bicycles and a couple of trucks here and there, but passenger cars were few and far between. The ones you did see were typically imported Mercedes, which usually belonged to government officials. But here was a high-ranking Volkswagen official saying that China was going to develop a major automotive industry. More important, he was saying that Volkswagen, a major player in the global industry, was counting on China for a great deal of growth. I sat up in my seat and started to listen more closely.

But, autos are a big industry that accounts for over 12 percent of global GDP. What segment of the auto industry should I focus on? When he finished his presentation, Dr. Messmann opened the floor for questions. His response to the first provided an answer.

“What’s your biggest problem?” somebody asked.

Without a moment’s hesitation, Dr. Messmann replied, “Our biggest problem is getting an adequate supply of high quality parts.”

When I’d been in investment banking, I had called on a number of companies in the automotive components area. Though times were tough then, in the late ’70s, I looked back at financial statements from the ’50s and ’60s and saw that these companies had all been very profitable. This had been America’s growth period in autos. GIs returning from World War II, people like my dad, wanted to get on with their lives and were buying houses, refrigerators, and cars in huge numbers. As General Motors, Ford, and Chrysler expanded production, components companies could literally fill up their plants for the year after three golf dates with buyers from the Big Three. If Messmann was right, the same thing was now about to happen in China 40 years later.

“Wow!” I thought to myself. As Yogi Berra had said, “This is déjà vu all over again!”

Dr. Messmann gave me the first hint that auto components might be a good industry to investigate. After all, if companies like Volkswagen were looking for new suppliers in China, there seemed to be a vacuum that needed to be filled, and that spelled opportunity.

I didn’t see Dr. Messmann again until last week, nearly 16 years later. In writing Managing the Dragon, I learned that he had left Volkswagen and was now teaching law at Central European University, a very interesting English-speaking graduate school in Budapest that was founded by George Soros, one of Hungary’s most famous émigrés. After communicating by e-mail, Dr. Messmann invited me to Budapest to meet CEU’s senior faculty and to deliver a lecture at the school.

What a great two days! Dr. Messmann and CEU could not have been more hospitable, and Budapest is a fabulous city that is full of history. As I also learned, CEU is one of a kind. Founded in 1991 with the explicit aim of helping the countries of Central and Eastern Europe and Central Asia transition from dictatorship to democracy. CEU’s 1400 students come from 80 different countries. As I stood there answering their questions, I was struck by the fact that the students surrounding me were from Slovakia, Russia, Uzbekistan, Kazhakstan and Nigeria, countries I rarely come in contact with. Like students everywhere, they were eager to learn more about China and how they might do business here.

Just as Dr. Messmann opened my eyes to the auto components opportunity in China 16 years ago, he has now opened my eyes to a new part of the world. I want to learn more, but my instinct is that this is a very interesting part of the world that may be a great connection for any China business. The region is comprised of countries that, like China, have emerged from closed economies and are now rapidly making up for lost time. These countries have much in common with China, including a lower cost perspective, and are rich with many talented and motivated people with a strong desire to get ahead.

Once again, thank you Dr. Messmann.

This year will forever be known as the year of the Olympics in China. But long-term, 2008 may be better remembered as the first year in which China’s auto industry out-produces vehicle assemblers in the United States.

While the U.S market, at 16 million vehicles or more per year, is still considerably larger than China’s, the output of U.S.-based assembly plants is approximately 11 million units annually, with 5 million or so vehicles imported each year from Japan, Korea and Europe. Due to the slowdown in the U.S. economy, many analysts are predicting that U.S. vehicle output in 2008 will be less than 10 million vehicles for the first time since 1992. Meanwhile, vehicle production and sales in China are forecasted to exceed 10 million units in this year of the rat.

Based on the first quarter figures, China’s auto industry is on track to do just that. For the first three months of the year, assembly plants in China churned out almost 2.6 million vehicles, a 21 percent increase from production levels in the Q1 of 2007. Passenger car production, which accounted for 1.9 million units, increased by 20 percent over last year, while commercial vehicles (trucks and buses) accounted for 728,000 units and grew at a 24 percent pace. Of all vehicle categories, heavy-duty truck production led the way with a stunning 59 percent increase. During the quarter, 167,232 heavy-duty trucks were produced in China, making China the largest market for vehicles of this size in the world.

In passenger cars, Volkswagen, with joint ventures in both Shanghai and Changchun, leads the pack with an 18.7 percent market share. General Motors at 9.2 percent is second, but Toyota is close behind with a 9.0 percent market share, followed by Honda at 8 percent. Chery is fifth and is the highest-ranked Chinese assembler with a 7.1 percent market share.

With Asian assemblers accounting for eight of the top 10 slots, the China market may provide a preview of the new world order in the global auto industry. Japan leads the way with four positions (Toyota #3, Honda #4, Nissan #6 and Suzuki #9; China has three (Chery #5, Geely #8 and Tianjin Auto #10) and Korea one (Hyundai #7). The remaining two positions are held by Europe (Volkswagen #1) and the United States (GM #2). As a group, the top 10 assemblers account for 70 percent of passenger car production in China.

Production and sales of heavy-duty trucks were unusually high during the first quarter due to the strength of the underlying economy and a certain level of pre-buying. In July, China will begin implementing regulations that require all six-cylinder diesel engines used in over the road vehicles to meet Euro III emission requirements.

Because of China’s history of on-again, off-again enforcement of emissions and other regulations that increase the cost of doing business for basic industries such as trucking, the market has been taking a wait-and-see approach to July 1. During the first quarter, it appears that truck buyers have decided to take no chances and to purchase the cheaper Euro II vehicles while they can. A truck that meets Euro III emissions standards may cost as much as 10 percent more than the EURO II version of the same truck.

The global auto industry is the largest industry in the world and accounts for approximately 10 percent of global GDP. Long dominated by the markets in the United States and Europe, the center of gravity has now shifted to Asian countries which now represent 40 percent of the global market for vehicles.

Every year since 2001 when China’s entrance into the World Trade Organization reignited the growth of China’s auto industry, vehicle production has grown by at least one million units, registering annual increases of from 20 percent to 50 percent. The numbers for the first quarter suggest that the torrid rate of growth of China’s auto industry is showing no signs of letting up.

It didn’t take long for the 65 percent hike in iron ore prices by Cia Vale do Rio Doce (CVRD) to work its way into the Chinese economy. Last week, Baosteel, China’s largest steel producer and the company that negotiated the new iron ore supply agreement with the Brazilian producer on behalf of China’s steelmakers, raised prices by up to 20 percent, significantly increasing manufacturing costs for companies making everything from appliances to cars in the process. The sell recommendations went out immediately, as stock market analysts concluded that China’s manufacturers would not be able to pass along the higher cost of steel to consumers in China’s price competitive industries.

I’m not so sure they are right.

In meetings with several of my managers earlier this week, I was pleasantly surprised to learn that they are already passing along higher raw material costs to customers. In 2005, when we were hit with the first significant run up in raw material prices, input costs had not changed appreciably in more than 20 years and everyone was caught flat-footed. Particularly in a country like China, where prices had only been going one way—down—managers were not used to pressing customers for price increases. Now it seems, they are doing so very aggressively.

When I commented that we had obviously learned a lot over the past three years, my managers shook their heads and said it was true. “We are getting better at negotiating increases, but there is more to it than that. 2008 is different from 2005. Since 2005,” they said, “companies that have not raised prices have either lost all of their cushion, or have fallen by the wayside. As a result, companies that have survived and prospered during this period have a greater ability to negotiate with customers in 2008 than they did in 2005.“

Besides being heartwarming, this conversation confirmed my suspicions as to why inflationary pressures are now coming to the surface, not only in China but around the world. When the first raw material price shockwave hit in 2005, manufacturers the world over, including those in China, were caught in a giant cost/price squeeze. China’s emergence as the world’s workshop had lowered the price for just about every manufactured product, while rising demand in China had helped to increase the price of every raw material. At the same time, competition in and from China prevented manufacturers from raising prices, resulting in decreased profit margins. If what my managers are telling me is correct (rising producer prices suggest that they are), that is bad news for inflation, but good news for manufacturers seeking to restore profit margins. With all their cushion gone, manufacturers have no choice but to pass along higher costs, and consumers have no choice but to accept them.

At the Economist Automotive Conference in Shanghai Thursday, I discovered another silver lining in this latest spike in steel prices. In his presentation, the speaker before me, Jerry Van Alphen, Vice President-Finance of Alcoa Asia Pacific, extolled the virtues of using aluminum in products like automobiles. Cars that use more aluminum are lighter, and lighter vehicles burn less fuel. As a result, automakers have been seeking to replace steel with much lighter aluminum wherever possible as part of their efforts to develop more fuel-efficient, environmentally-friendly vehicles. One impediment to doing so is the fact that aluminum, pound for pound (or kilo for kilo), is more expensive than steel. With the significant increases in iron ore and steel prices, however, steel is now pricing itself out of more and more applications. Whereas the ratio of aluminum to steel prices has historically been in the range of 5 to 1, this ratio has now been reduced to 3.5 to 1, improving the relative economics of using aluminum. Therefore, higher steel prices may actually help the transition to lighter, more fuel-efficient vehicles. That’s good news for everyone.

Admittedly, I may seem to be grasping for straws in trying to find some positives in this latest hike in steel prices. In business, though, sometimes you just have to take good news wherever you can find it.

In the late 1990s, PSA, the large European car assembler, and DPCA, the joint venture which its Citroen unit formed with Dongfeng Motors in China in 1996, made a big mistake. The management of the company and its joint venture assumed that consumers in China would like the same types of cars as consumers in Europe and introduced their hatchback model. The result: a big flop.

In PSA Gets It Right in China, I wrote:

In addition to a slow developing market, the joint venture stumbled trying to find its way in China. Despite the popularity of PSA’s hatchback models in Europe, DPCA found that Chinese consumers wouldn’t buy them when they were first introduced in China. Without a proper trunk, it seems that hatchbacks didn’t fit the Chinese consumer’s idea of a sedan. Fearing that they would be seen by contemporaries as not being able to afford a real sedan with a trunk, consumers considered it a loss of face to own one. DPCA redesigned the hatchback model to include a trunk, and sales improved.

Well, it seems that the folks in Poissy and Wuhan were right after all. The Chinese consumers have learned to like—no, strike that— they have learned to love hatchbacks according to Automotive News China.

“The hatchback is more attractive than the traditional 3-box sedan for young, single and female buyers in the cities,” said Mei Songlin, China general manager, J.D. Power Asia Pacific Inc.

Cindy Gao, a single, 24-year-old graphic designer in Shanghai, is about to buy a red Focus hatchback with a 1.8 liter engine. “All the young people like it because it is very fashionable and sporty looking,” she says. “It’s also economical on gas.”

As if to prove that this is not simply a case of foreign manufacturers imposing Western tastes on Chinese consumers, seven local car companies—Chery, Geely, Lifan, Great Wall, Brilliance, BYD and Nanjing Automobile—plan to launch hatchback models in 2008, according to Automotive Resources Asia’s forecasting division.

The 101st North American International Auto Show, often referred to as NAIAS, or simply the “Detroit Auto Show,” was held last month from January 13-27. Since 1961, this annual event has been held at Cobo Center in downtown Detroit where it occupies 1 million square feet (93,000 square meters) of floor space. NAIAS 2008 welcomed more than 700,000 attendees to the show, 6,000 international media from nearly 60 countries, along with 37,000 industry insiders from 2,000 companies. At this year’s show, 58 vehicles were unveiled, of which 44 made worldwide debuts and 14 were shown for the first time in North America.

Before 1957, the Detroit Auto Show was a purely American affair. In that year, international auto manufacturers displayed their cars for the first time. Joining the domestic models from the Big Three were models offered by leading European producers such as BMW, Jaguar, Mercedes-Benz, Porsche and Volvo. By the 1980’s, the show had become one of the world’s biggest, in terms of status and the sheer number of vehicles on display—and it had become more international in scope. Both Toyota and Nissan chose the NAIAS as the stage for the worldwide introductions of their new Lexus and Infiniti luxury divisions.

In 2006, the Detroit Auto Show welcomed for the first time an automaker from China. The small silver sedan that Geely Automobile Company displayed outside Cobo Center in that year attracted numerous representatives from automakers and the media. With all of the buzz about Chery’s plans to enter the U.S. market, everyone was curious to see what a Chinese car looked like.

In the most recent show, Chinese car companies participated for the third straight year, and this time, there were five representatives from China’s fast growing auto industry present. Geely, Changfeng and BYD displayed models ranging from compact sedans and SUV’s to a plug-in hybrid, and Chamco Auto, the American partner of Zhongxing Automobile, and Li Shi Guang Ming Automobile Design made their first appearances in Detroit. Geely showed six models, including the CK1 Freedom Cruiser, a budget compact sedan; Changfeng offered four models, including the Liebao CS6 SUV; and BYD showed models including the F6, featuring its hybrid drivetrain. Not only did BYD bring a cutaway model of its plug-in hybrid system to demonstrate how it all works, the company’s chairman gave a spontaneous test drive on the show floor. BYD says the car will go on sale in China this year.

While Chinese car makers are becoming active participants in the Detroit Auto Show, the hurdles to penetrating the United States market are significant. Much engineering work remains to be done on Chinese vehicles to meet U.S. regulatory specifications for safety and exhaust emissions. Chinese cars also need improvement in terms of fit and finish and overall engineering refinement. On top of that, an even larger task involves developing a distribution and dealership network in the U.S., a considerable undertaking when starting from scratch with an unknown brand. Nonetheless, U.S. industry analysts and executives are getting used to the idea that as far as cars from China showing up on U.S. roads, it is only a question of “when” not “whether.”

For their part, most Chinese vehicle makers are wary of entering the United States market too early, and say their presence in Detroit is only a way to test the reaction of consumers and to get a first-hand look at how they stack up against the competition. Many admit they are years away from committing to the U.S. and will first look for growth close to home. Subsequent entry and expansion plans are likely to target emerging markets such as Africa, South America, and Eastern Europe, where the regulatory environment is less strict, the lack of brand recognition is less important, and a low-price product strategy can quickly create a new market niche.

This strategy appears to be working. In 2007, China exported 612, 380 vehicles, a 78% increase from the the previous year. Within the vehicle category, exports of passenger cars reached 264,501, more than double the number exported in 2006.

Two of the Chinese car companies with the best prospects of entering the United States auto market did not even participate in the Detroit Auto Show. Chery, which has a contract to manufacture subcompacts for Chrysler, will be getting a crash course from Chrysler in how to meet U.S. safety and emissions requirements, and must be considered a favorite to begin supplying cars to American consumers as a result. Also, China Brilliance has passed quality tests in Germany and has signed a contract with a dealer to sell 100,000 cars into the German market over the next five years. Brilliance exported 1,900 cars to Germany last year, and is targeting 6,000 units in 2008.The model being exported is the “Zhonghua Zunchi” which is powered by a 2 liter engine made in China. If Brilliance can meet Germany’s stringent requirements, sales to the US market cannot be far behind.

Despite concern for the North American vehicle market in 2008, the Detroit Auto Show was considered a great success. Automakers seemed encouraged by the many opportunities offered by globalization and the wide variety of new technologies on display. With more representatives from China, the fastest growing automotive market in the world, NAIAS continues to evolve into a truly global event.

The dates for next year have already been set. The 2009 Detroit Auto Show will be held from January 11-25 in Detroit. Book your tickets now!

As reported earlier this week, China produced 8.8 million vehicles in 2007, a 22 percent increase over 2006. Passenger car production led the way with a nearly 25 percent increase to 5.3 million cars, followed closely behind by trucks which increased by over 22 percent to 2.1 million units. Busses registered an 11 percent increase to 1.3 million vehicles.

China is rapidly becoming one of the largest passenger car markets in the world. Over 150 different models of cars are now being produced here, with nearly every global assembler represented. In addition, fast-growing Chinese companies such as Chery, Geely, BYD, Great Wall and Chang’an are taking an ever larger share of the China market. In an industry once completely dominated by foreign brands, passenger cars produced by purely local companies now account for almost 29 percent of the cars made in China.

Within the truck category, the production of heavy duty trucks showed a stunning increase of 59 percent in 2007. China’s production of 487,000 heavy duty trucks last year makes it the largest market in the world for trucks in this category. By way of comparison, the production of heavy duty trucks in the U.S. and Europe vary between 250,000 to 350,000 per year in each market, respectively, depending on economic conditions and other factors.

Although the China market is larger in terms of units, heavy-duty trucks in China tend to be considerably smaller and much less expensive than heavy duty trucks produced for the U.S. and European markets. Whereas a heavy duty truck used in the U.S. or Europe might easily cost in excess of $100,000, a heavy duty truck in China may be purchased for well under the equivalent of $40,000. That is one of the reasons that truck exports from China are growing.

Unlike the passenger car market where foreign brands still dominate, virtually all of the trucks used in China are made by local Chinese companies. Continued growth of the Chinese economy, increased needs for freight transportation, further infrastructure spending, a greatly expanded highway system, and new emissions and overloading regulations are all driving the growth of this segment of the auto market.

Vehicle export figures for 2007 are not yet available. However, China exported 535,000 vehicles through the first 11 months of the year, almost equally divided between passenger cars and trucks. Vehicle exports will almost certainly approach 600,000 units for the full 12 months of the year, which would represent a stunning 75 percent increase over the number of units exported in 2006. Although the majority of China’s vehicle exports now go to the Middle East, Russia, Southeast Asia and the developing economies of Africa, it’s only a matter of time before more end up in the developed markets of the U.S. and Europe.

By any measure, China is now a bona fide major player in the global automotive industry. China’s rise in this industry has been nothing short of meteoric. In 2001, the year in which China joined the World Trade Organization, vehicle production stood at just over two million units. In the six short years since, production has more than quadrupled to its current level. Moreover, most experts predict that China’s vehicle production will increase to more than 10 million units in 2008. At that level, China’s production will be equal to that of the U.S. and Japan, each of which produces approximately 11 million vehicles per year. (Although the U.S. market for vehicles is the largest in the world and has been in excess of 16 million units per year since the late 1990’s, at least 5 million vehicles are imported into the U.S. each year from assemblers in Japan, South Korea and Europe.)

Due to the housing and sub-prime crisis, and an expected recessionary environment in the United States, industry analysts are predicting that the U.S. market for vehicles may fall below 16 million vehicles in 2008 for the first time in many years. As a result, some expect U.S. vehicle production to fall below 10 million vehicles for the first time since 1992.

If that indeed occurs, and China produces more than 10 million vehicles as expected, China could surpass the U.S. in total production in this Olympic year. That’s well before anyone, including myself, could have predicted in their wildest imagination, even as recently as five years ago.

Last week, Tata Motors Ltd., India’s largest truck maker, unveiled what is being touted as the world’s cheapest car, the Nano, priced at 100,000 rupees, or $2,500. The Nano will cost only half as much as Suzuki’s Maruti 800, the cheapest car currently available in the Indian market. Ratan Tata, the company’s chairman, said he was inspired to develop the car when he saw a family on a scooter and then thought of building an automobile that was all-weather safe, fuel-efficient and affordable. Almost 500 engineers worked on the project over the past four years, he said. Tata plans to produce 250,000 Nano’s per year. With its eyes set on the global markets as well as its home market in India, Tata is also in talks with the Ford Motor Company to acquire Ford’s two luxury brands, Jaguar and Land Rover.

Within hours of the announcement, my inbox was filled with e-mails from around the world, friends and colleagues wondering what this meant for China. Most phrased their questions diplomatically, but one friend was particularly blunt and asked the question that was really on everyone’s mind: “Jack, if this is true, doesn’t it mean that India just ate China’s lunch by developing the world’s cheapest car?”

Of course, I had heard rumblings of what Tata was doing before this, and had also heard that Nissan was planning a $3,000 car, but now that Tata’s official announcement was out, I decided to try and understand better what was taking place. By the end of the day, after my colleagues at ASIMCO and I had completed our research, I concluded that rather than designing the Nano, Tata should have instead bought a set of prints for the Alto from Suzuki; removed the radio, air conditioning, passenger side mirror, and one windshield wiper; and contracted to have the car manufactured in China. By doing so, Tata would have ended up in about the same place as it did with the Nano, and saved 2,000 man years of engineering in the process. Here’s how we came to this startling conclusion.

We began by surveying the market to find the most economical car that we could buy in China. Our first thought was of Chery’s QQ, but with a dealer price of RMB 30,800, or $4,219, it was still a bit out of our price range. We then found that we could buy an Alto from Jiangnan Alto, based in Xiangtan in Hunan Province, for RMB 23,800, or $3,260. (For the history buffs out there, Xiangtan may sound familiar because it is the birthplace of none other than Chairman Mao.) Because the $3,260 is the customer price, we took 95% of that amount ($3,097) to adjust for the dealer profit and get a dealer price comparable to the $2,500 price tag for the Nano.

In 1988, Chang’an Machinery, an arm of a large industrial/military company belonging to the Chinese Central Government called Norinco, signed a deal with Suzuki Motor Corporation of Japan to develop and produce Suzuki’s Alto minicar in China. The Alto was first produced by Chang’an in Chongqing, but then in 1992, Norinco added manufacturing capability at three of its other locations, including Jiangnan Machinery in Hunan Province. The two other facilities ultimately quit producing the Alto, but Jiangnan continued on. To date, we estimate that Chang’an Auto and Jiangnan Alto have produced and sold over 600,000 Alto’s in China.

On the surface, Jiangnan Alto’s price, while the lowest in China, appears to be 20% higher than the Nano. But, comparing the Nano to a Jiangnan Alto is like comparing an apple to an orange. These are very different cars as shown by the chart below which Sophy, my assistant, prepared with the help of one of our engineers.

Nano vs Alto Chart

The Nano is a stripped down car compared to the Alto. It does not have a radio, air conditioning, a passenger car mirror and two windshield wipers, all of which are standard with Jiangnan’s Alto. Moreover, the Alto has a much larger engine with more horsepower and an enhanced ABS braking system. The engine alone, we estimate, accounts for at least $400 of the $600 price difference. Add in the price of a radio, air conditioning and ABS, and the Alto is more than price competitive with the Nano.

But we didn’t stop there. All of the articles about Tata’s Nano mentioned that the Maruti 800 was the next cheapest car in India and cost twice as much as the Nano. Knowing that the Maruti 800 was also developed by Suzuki, I asked Sophy to compare its features with that of Jiangnan’s Alto. A few minutes later, she came into my office and said, “Except for the price, $5,000 versus $3,097, these are exactly the same cars!” India’s Maruti 800 is an Alto by another name. In other words, on an apples to apples comparison, making the same car in China is almost 40% cheaper than it is to make it in India!

Despite the hype surrounding the Nano, China is the unquestioned low cost producer in the world when it comes to products like passenger cars. Could a Chinese car company produce a car that sells for $2,500? Absolutely. The reason none do is that even the low end car buyers in China want engines of a certain size and certain features like a radio. Chinese assemblers aren’t just trying to make cheap cars. They are trying to make cars that Chinese consumers want.

Ever since I first came to China in 1993, the China versus India debate has raged. At that early date, the auto industries in each country were about the same size, and at least on paper, each promised to become the largest in the world. For many reasons, China’s auto industry has forged ahead to become the world’s second largest, distancing itself from that of India’s. In many industries, India has strong advantages over China. In auto’s, though, China remains the biggest, fastest growing market and the world’s future industry leader.

While detailed figures will be available later this week, ASIMCO’s inside sources tell us that China produced 8.8 million trucks, buses and passenger cars in 2007, more than expected and a 22 percent increase from the 7.2 million vehicles produced in 2006. In 2008, most industry analysts predict China’s vehicle production to grow to more than 10.0 million vehicles.

With some reports that U.S. vehicle production may drop to less than 10.0 million vehicles in 2008, China may be the world’s largest producer of vehicles as early as 2008 or 2009, much sooner than anyone has expected.

According to Douglas Brinkley, who wrote Wheels for the World on the occasion of the 100th year anniversary of the Ford Motor Company, “Ford’s reasonably priced and well made assembly-line Model T mobilized America’s middle class.”

Before the introduction of the Model T by Ford in 1908, only the rich could afford an automobile. Priced at $850, the Model T began America’s love affair with the automobile by making the purchase of a car possible for a wider range of Americans, even the ordinary workers in the country’s steel and automobile factories. The rest is history.

In much the same way, the motorcycle has liberated hundreds of millions of Chinese. When I first began traveling through the China countryside in 1993, I was amazed at how motorcycles were being used to transport people and goods over less than ideal roads, in much the same way that Americans might transport people and goods on American highways. It was not uncommon then, and it is not uncommon now, to see whole families riding on a single motorcycle, or a farmer transporting a dozen chickens to market on his two wheeled “truck.”

Even at that early date, China was the largest manufacturer of motorcycles in the world. In 1992, China’s more than 100 motorcycle manufacturers produced close to 2 million motorcycles. But that was only the beginning. In 2007, China produced well over 23 million motorcycles and is far and away the largest manufacturer in the world.

Over the past five years, the auto industry has been getting all of the headlines for its role in mobilizing China’s urban population, but the motorcycle has been quietly doing the same job for the two-third’s of the country’s population that depend upon the agricultural economy for their well being. While China’s rural population might prefer to drive a car or a truck, even the cheapest vehicles are still outside their reach. Priced at anywhere from the equivalent of $300 to $900, however, motorcycles can perform many of the same functions, even if they do so with much less comfort.

In addition to providing wheels for the China economy, motorcycles made in China are now a big export item. In 2007, China exported over 9.0 million motorcycles to 159 countries, including Nigeria, Turkey, Argentina, Indonesia, Columbia, Venezuela, Mexico, Brazil, Myanmar, Philippines, Vietnam and Laos. And, those China made motorcycles are having the same impact on many of those countries that they have had on China’s—they are transforming them.

Just before the end of the year, my youngest daughter, who is about to embark on a year-long, around the world trip which will take her to a number of Asian countries, pointed me to a New York Times article written by Thomas Fuller: In Laos, Chinese Motorcycles Change Lives.

Here are a few excerpts that I found particularly interesting:

The pineapples that grow on the steep hills above the Mekong River are especially sweet, the red and orange chilies unusually spicy, and the spring onions and watercress retain the freshness of the mountain dew.

For years, getting this prized produce to market meant that someone had to carry a giant basket on a back-breaking, daylong trek down narrow mountain trails cutting through the jungle.

That is changing, thanks in large part to China.

Villagers ride their cheap Chinese motorcycles, which sell for as little as $440, down a dirt road to the markets of Luang Prabang, a charming city of Buddhist temples along the Mekong that draws flocks of foreign tourists. The trip takes one and a half hours.
“No one had a motorcycle before,” said Khamphao Janphasid, 43, a teacher in the local school whose extended family now has three of them. “The only motorcycles that used to be available were Japanese, and poor people couldn’t afford them.”

Inexpensive Chinese products are flooding China’s southern neighbors like Cambodia, Laos, Myanmar and Vietnam. The products are transforming the lives of some of the poorest people in Asia, whose worldly possessions a few years ago typically consisted of not much more than one or two sets of clothes, cooking utensils and a thatch-roofed house built by hand.

The concerns in the West about the safety of Chinese toys and pet food are largely moot for the people in the remote villages here. As the introduction to global capitalism, Chinese products are met with deep appreciation. “Life is better,” Mr. Khamphao said, “because prices are cheaper.”

Chinese television sets and satellite dishes connect villagers to the world. Stereos fill their houses with music. And the Chinese motorcycles often serve as transportation for families.

What a great story! Amid all of the controversy surrounding the “Made in China” crisis, and concerns about the loss of jobs to Chinese factories and China’s growing trade surplus, I found it refreshing to read about one of the positive effects of globalization and China’s development. Many thanks to Thomas Fuller and The New York Times for bringing this story to us.